Answer:
- What amount will Allegheny report as bad debts Expense on its Year 2 income statement?
Dr Bad Debt Expense $ 8,250
Cr Allowance for Uncollectible Accounts $ 8,250
Explanation:
- Balances in Accounts Receivable and Allowance for Doubtful Accounts of:
Dr Accounts receivable $ 68,000
Cr Allowance for Uncollectible Accounts $ 3,450
- Allegheny write off $6300 of Uncollectible Accounts.
Dr Allowance for Uncollectible Accounts $ 6,300
Cr Accounts receivable $ 6,300
- Allegheny estimates that the ending Allowance for Doubtful Accounts balance should be $5,400
Dr Bad Debt Expense $ 8,250
Cr Allowance for Uncollectible Accounts $ 8,250
Because the company already has a DEBIT balance ($2,850) in the Allowance for Doubtful Accounts
it's necessary to register an entry that COMPENSATE ($8,250) the existing value and reflect the value estimated as bad debts ($5,400 = $8,250-$2,850).
If the company applies the allowance method, it means that the account Allowance for Uncollectible Accounts must show as balance the % of estimated value.
Bad accounts are those credits granted by the company and there is no possibility of being charged.
"When customers buy products on credits but the company cannot collect the debt, then it's necessary to cancel the unpaid invoice as uncollectible."
One way is to directly cancel bad debts at the time it was decided that the credit is bad, the total amount reported as bad debt expenses negatively affect the income statement and the accounts receivable are reduced by the same amount, less assets
.
The other way is to determine a percentage of the total amount of accounts receivable as bad debts, there are many ways to analyze accounts receivable and calculate the value of bad debts.
When the company has the percentage of uncollectible accounts, the required journal entry is Bad Expenses (debit) with Reserve for Bad Accounts (credit)
At the time of cancellation, since the expenses were recognized before, we only use the Allowance for Uncollectible Accounts (Debit) with accounts receivable (credit), with this we are recognizing the bad credit of the company.
